Many of the world’s most successful businesses are run by multigenerational families. Christian Dior, Peugeot and Lego are three prominent examples. While over 70% of Australian businesses are family run, only 30% survive the transition from first to second generation with just 12% making it to the third generation. – David Harland, Managing Director of FINH
What is it about family businesses that make them so susceptible to failure? While the reasons are varied we have found some common themes run through them. Here is a list of four of those along with actionable tips to assist in ensuring your family business prospers from one generation to the next.
1. Heirs Lack Financial Education
Many children born into wealth are ill-prepared to manage money due to a lack of financial education from their predecessors. This results in poor decision making and puts the family’s capital at great risk. Families who also fail to nurture a sense of responsibility, stewardship, history and family values in the generations to come, ultimately fail their business.
Educate your next generation about wealth and responsible financial management as early as possible. Protect family wealth by insisting on premarital agreements and separation of personal and family property.
2. A Culture of Nepotism
Families who continue to promote unqualified family members into positions of power simply because they are part of the founding family, are also on a fast-track to failure.
Professionalise the business by establishing employment standards for both family and non-family employees. Develop a family business employment policy which clearly delineates the following:
- How a family member gets a job in the business (ie do they follow a normal application process?)
- What experience they need
- How they are renumerated
- Write detailed job descriptions
- Note down pertaining to annual performance reviews
In doing this, you may find it useful to use industry benchmarks to help you establish clear roles and expectations, particularly around salary.
3. Those persistent succession planning struggles
The vast majority of family businesses encounter difficulties when it comes to succession planning. According to the 2016 Family Business Survey by the National Bureau of Economic Research, 43% of family firms don’t have succession plans in place.
Many current generation leaders delay retirement as they struggle to accept – as well as begin – the process of letting go. This delay often means their succession planning strategies are reactionary, rather than carefully and thoughtfully planned out, if say an unexpected illness occurs. This poses even greater risks to the business and family’s financial health.
Start success planning now. Whether you intend to have an internal successor or bring in outside managers, proper succession planning takes years. If you truly want to ensure your business will survive after transition or death, it’s critical you begin laying the groundwork early and prudently.
Before you being this process, make sure you understand the distinction between estate planning and succession planning. If you require further assistance in the area of succession planning, my article Six simple steps for succession in family business may help.
4. A lack of family governance structure
Many families are reluctant to address governance issues because it forces them to confront the possible need for major changes in how they manage their business. Governance structures formalise exactly who does what and how, but also provides a distinct line between family and business. Without family governance, one can easily fall victim to internal discord and ownership issues down the track.
Protect your business by instituting formal governance and ownership structures that clearly separate family control from the daily management of the business.
Consider bringing in professional managers to run the business while retaining family ownership stakes. Many successful multigenerational family firms undertake this practice as it allows them to focus on diversifying and managing their wealth, while also making it easier to navigate generational transitions.
That is my brief summary of the top four reasons why family businesses fail. Being aware of these hurdles is key to avoiding – or at least, overcoming – them. I hope this information helps you open the dialogue necessary to ensure the continued success for your multigenerational family business.
If you are looking for help with your family business, please don’t hesitate to call us at FINH on 3229 7333.